SEARCH
Financial Statement Basics
Financial statements provide access to a company’s financial health at a given point in time. The three important financial statements that provide an overview of the results of a company’s business activities are ‘The Income Statement’, ‘Balance Sheet’ and the ‘Cash flow Statement’. While these articles briefly describe the importance of these three statements, they also highlight the shortcomings which need to be considered. There are a number of economic transactions a business engages in, like raising capital, investing in assets, buying raw materials on a credit or cash basis, processing raw materials into finished goods, selling their products on a credit or cash basis and paying taxes. The interested groups involved in each of these activities, including shareholders, creditors, suppliers, business partners and tax authorities often seek answers to the following important questions: a) How has the business performed over a given period of time? b) What is the financial position of the company at a given point of time? and, c) What have been their sources and uses of cash? These questions can be answered by examining the three important financial statements. These statements are prepared on a quarterly, interim (half yearly) and annual basis. It is prudent for investors to familiarize themselves with more than just the last year of statements before making an investment in any company. Moreover it is crucial to understand that even though each of these financial statements provides answers to key questions about the profitability and financial health of a business, they have their own shortcomings and cannot be analysed independently. Financial statements not only provide information about the past performance of a company, they also provide insights about the ability of a company to sustain itself in the future.